Week 6 Pod 2

CUSTOMER CENTRICITY

Customer retention
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What metric is used by most firms to gauge and guide their retention activities? Churn/attrition rate (or retention rate) This is a good metric, but you need to examine it at the right level

Vodafone attrition rate

(quarterly annualized %)

Source: Vodafone Germany Analyst & Investor Day presentation (2004-09-27)

Celebrate heterogeneity!

% customers

Attrition rate

Source: Vodafone Achievement and Challenges in Italy presentation (2006-09-12)

Translation to CLV
Cluster Attrition rate % customers

Low risk Medium risk High risk

0.06 0.35 0.65

70 20 10

% customers

Attrition rate

Average attrition rate: 0.177

(0.06 ! 0.70 + 0.35 ! 0.20 + 0.65 ! 0.10 = 0.177)

Expected lifetime using this average attrition rate: 5.6 years !! Whats wrong with this calculation?

The key insight Because we cant get accurate calculations with averages, we must work with the actual rates for each separate class of customers.
Reichheld, The Loyalty Effect, p. 54

Translation to CLV
Cluster Attrition rate % customers Expected lifetime

Low risk Medium risk High risk

0.06 0.35 0.65

70 20 10

16.7 2.9 1.5

% customers

Attrition rate

Average attrition rate: 0.177

(0.06 ! 0.70 + 0.35 ! 0.20 + 0.65 ! 0.10 = 0.177)

Expected lifetime using this average attrition rate: 5.6 years Correct average lifetime: 12.4 years (16.7 ! 0.70 + 2.9 ! 0.20 + 1.5 ! 0.10 = 12.4)

Customer retention: summary

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There is no average customer, and calculations based on such a notion will always underestimate the value of a customer base
"!

And the difference can be huge!

!!

When heterogeneity is accounted for, the attrition elasticity is much lower than in the homogeneous case
"!

Investments in reducing attrition will have more modest returns than expected